Engulfing Line : Bearish Pattern

An Engulfing Line (Bearish) is a Short-term Bearish Pattern which indicates a possible reversal of the current uptrend to a new downtrend. This pattern is an indication of a financial instrument's SHORT-TERM outlook.

The Engulfing Line (Bearish) occurs when the Real Body for a price bar is larger than the Real Body for the previous price bar. In addition, for an Engulfing Line (Bearish), the Real Body of the previous session must be White (close higher than open) and the Real Body of the second session must be Black (close lower than open).

Criteria that Support

The difference in the sizes of the two Real Bodies can be an important indicator of the significance of the Engulfing Line. If the Real Body of the previous session is substantially smaller than the Real Body of the following session then this pattern should be considered more significant. The greater the size difference the more significant the formation.

The longer and higher the inbound trend that leads into the Engulfing Line, the more significant the pattern.

Look for heavy volume on the following session. A noticeable increase in volume from the previous few sessions is a strong indication that this pattern is more significant.

If the following session "engulfs" more than one session's Real Body this pattern is very significant.

Two Bar Reversal : Bullish Pattern

A Two Bar Reversal (Bullish) is a Short-term Bullish Pattern which indicates a possible reversal of the current downtrend to a new uptrend. This pattern is an indication of a financial instrument's SHORT-TERM outlook. One and two-bar patterns reflect changes in investor psychology that have a very short-term influence on future prices - typically less than 10 bars. Often the immediate effect is trend reversal. For traders looking for clear entry and exit points, these patterns serve well. They are normally not suitable as signals for long-term investors unless viewed as monthly bars.

A Two Bar Reversal is a classic signal of trend exhaustion. When these patterns occur after a pronounced advance or decline, the first bar should exhibit a dramatic continuation of the inbound trend, closing close to the bar's extreme end. The second bar completely negates the first bar, with the open price on the second bar being close to the close of the first bar and the close of the second bar being close to the open of the first bar. Wider trading ranges on both bars denote a more climactic reversal in psychology.

Trading Considerations

Two Bar Reversals can be either Bullish or Bearish depending on the direction of the inbound price trend. If the inbound trend is up, then upon identification of a Two Bar Reversal, taking a short position or selling a long position is recommended. Conversely, if the inbound price trend is down, then upon identification of a Two Bar Reversal, taking a long position or closing a short position is recommended.

The degree that the price bars and volume characteristics match this description will likely have a bearing on the strength of the post pattern price movement. Good trading practice dictates that these signals should not be used in isolation: fundamental data, sector and market indications and other technicals such as support/resistance and momentum studies should be used to support your trading decisions.

Criteria that Support

A persistent downward inbound trend is required; the longer and sharper, the better.

Both bars should have exceptionally wide trading ranges relative to the previous bars formed during the inbound trend.

For both bars, the opening and closing prices should be as close to the extreme points of the bars as possible.

Volume, if available, should be higher on both bars to accentuate the sentiment reversal. The greater the expansion of volume, the better the signal.

Underlying Behavior

Two Bar Reversals signal the dashing of hopes for those traders and investors that had been riding the trend or had jumped on board the especially wide trading of the pattern's first bar. The second bar, by completely reversing the ground made on the first bar, turns the tide of inbound sentiment and replaces it with an equal and opposite sentiment view. Look for an outbound trend period that reverses any gains made in the lead up to the Two Bar Reversal.